Working Paper

The Effects of Institutional Investor Objectives on Firm Valuation and Governance

Abstract: We find that ownership by different types of institutional investor has different implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation relative to fundamentals, as well as the magnitude of this misvaluation. In contrast, transient institutional investors have the opposite effect. Using SEC Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results imply a more nuanced relationship between institutional ownership and firm value and corporate governance.

Keywords: Institutional investors; Investor type; Dedicated; Transient; Misvaluation; Corporate governance; Blockholding; Portfolio turnover; Information dissemination; SEC Regulation FD;

JEL Classification: G30; G32; G14; G38;

https://doi.org/10.17016/FEDS.2016.088

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2016-11

Number: 2016-088

Pages: 69 pages